Legal Definition of 'Liquidity'



LIQUIDITY

The degree of ease and certainty of value with which a security can be converted into cash.

The ability of a business to meet its obligations as they come due; the more liquid a business is, the better able it is to meet short-term financial obligations.

Liquidity ratios are measurements used to calculate the degree of a company's liquidity. Some common liquidity ratios and the formulas for calculating them are as follows:

  • Accounts receivable turnover = Total credit sales divided by average accounts receivable
  • Accounts payable turnover = Total credit purchases divided by average accounts payable
  • Inventory turnover = Total cost of sales divided by average inventory
  • Acid-test = Cash plus securities plus accounts receivable, divided by current liabilities
  • Current ratio = Current assets divided by current liabilities
  • Working capital = Current assets minus the sum of current liabilities

Google+


More To Explore